One of the first decisions you need to make as an investor is whether to follow an ‘active’ or ‘passive’ investment strategy.
Active investing means picking individual stocks – either by paying to use an investment manager or doing it yourself through a broker. An investment manager, for instance, will make judgement calls based on their personal view of the market or the prospects of an individual stock.
This translates into buying and selling stocks on a regular basis – and trying to time the market to identify the best times to be in the market and when to get out.
The trouble with active investing is finding an investment manager who will consistently beat the market; not to mention the high fees they charge for their services.
Passive investing, meanwhile, is rapidly gaining in popularity –and is set to overtake active investing, according to a recent Moody's report.
In a nutshell, it is the complete opposite of active investing, with passive investors believing that individual stock picking and market timing are something of a fool’s errand. Accepted research over many decades backs this view up.
Instead, passive investors rely on a long-term strategy of buying and holding a portfolio of securities – very often in a range of asset classes – that track broader market indices. This enables them to reap the benefits of market gains and at a fraction of the cost of an active investment manager.
ETFs have facilitated this rise in passive investing; offering a cheap and easy way to invest in multiple asset classes.